PRIVATE CORPORATIONS

CORPORATION CODE OF THE PHILIPPINES

GENERAL PROVISIONS

SECTION 1: TITLE OF THE CODE

HISTORICAL BACKGROUND OF THE CORPORATION

CODE

PURPOSE OF THE NEW CORPORATION CODE OF THE

PHILIPPINES:

SEC.1 DEFINITION OF CORPORATION

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To establish a new concept of business corporations

so that they are not merely entities established for
private gain but effective partners of the National
Government in spreading the benefits of capitalism
for the social and economic development of the
nation.

Agatha Castillejo

A corporation is an artificial being created by

operation of law, having the right of succession and
powers,
attributes
and
properties
expressly
authorized by law or incident to it existence.
ATTRIBUTES OF A CORPORATION
It is an artificial being;
Created by operation of law
It has the right of succession; and
It has only the powers, attributes, and
properties expressly authorized by law or
incident to its existence.

SCOPE OF THE CODE

THE CORPORATION CODE PROVIDES:
For the incorporation, organization, and
regulation of private corporations, both
stock and non-stock and educational and
religious corporations;
Defines their powers and provides for their
dissolution;
Fixes duties and liabilities of their directors
or trustees and other officers thereof;

Declares the rights and liabilities of

stockholders or members;
Prescribes for the conditions under which
corporations, including foreign ones, may
transact business
Provides penalties for violations of the
Code; and
Repeal all laws and parts of laws in conflict
and inconsistent with the code

CORPORATION AS AN ARTIFICIAL PERSONALITY

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It has a legal or juridical personality completely

separate and distinct from its individual members or
stockholders. It is treated as a person by law. The
stockholders or members compose the corporation
but they are not the corporation.

(6) A corporation has no legal personality

to file cases in behalf of its stockholders
or members for recovery of properties,
privately/personally owned by them.
(7) A
corporation
being
a
distinct
personality as to its members and
officers, remains its existence even if all
the stockholders die.

CONSEQUENCE OF THE LEGAL CONCEPT OF CORPORATION

(1) The corporation is not liable for the
debts of its stockholders, and the latter
are not individually liable for the
corporations debts. They can lose no
more than their investment on the
corporation.
(2) It may acquire and possess property of
all kinds, incur obligations and bring
civil and criminal actions in its own
name in the same manner as a natural
person
(3) Property conveyed or acquired by the
corporation in its own name, is the
property of the corporation itself and
not of the members or stockholders.
(4) Contracts
entered
using
the
corporations name done by the regular
appointed
officers
are
of
the
corporation and not the members. It
may not be held liable for contracts,
obligations and indebtedness entered
into in the name and personal
capacities of its stockholders, even of
its president.
(5)
Tax exemption granted to a
corporation cannot be extended to the
dividends paid to its stockholders
Agatha Castillejo

DISREGARDING FICTION OF CORPORATE ENTITY (PIERCING

THE VEIL OF CORPORATE ENTITY)
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The legal personality of the corporation is for the

purpose of convenience and to promote the ends of
justice.
A corporations personality may be allowed to exist
for lawful purposes, but if its used to cloak or cover
for fraud or illegality, the fiction may be disregarded
and the individuals composing it will be treated
individually. This principle is called the doctrine of
piercing the corporate veil or disregarding the fiction
of corporate entity or the doctrines of corporate
alter ego. Upon application of this doctrine, the
creditors of a financially troubled corp. may go after
assets of the individual stockholders.

INSTANCES WHERE FISTION DISREGARDED

(1)Where a corporation functions for the benefit of a

single person who has complete control over
the funds and the said person is the sole owner
thereof. In such a case, the corporation is treated
as a mere alter ego of the controlling individual
thus its properties may be seized in an action
against the latter.
(2)Where
the
corporation
is
a
mere
instrumentality of the individual stockholders,
the latter must individually answer for corporate
obligations. To hold the stockholders liable is to
follow the purpose of the creation of a
corporations legal personality.
(3)Where a domestic or Philippine corporation are
controlled by aliens (controlling stockholders),
its nationality shall follow that of the aliens, in
case of wartime, for purposes of national security.
This is the control test in determining the
nationality of a private corporation.

(6)Where a corporation is formed by a person for

the purpose of evading his individual
contract. And;
(7) Where a corporation is dissolved and its assets
are transferred to another corp. to avoid
financial liability of the 1st corp. to its
Employees. Both firms owned by same persons,
the 2nd corp. shall be considered as a continuation
and successor of first entity.

CORPORATION AS A CREATION OF LAW OR BY OPERATION

OF LAW

(4)Where a corp. is organized by an insolvent

debtor to defraud his creditors by transferring
his properties to it for fraudulent purposes.

(5)Where a subsidiary company is created by a

parent company merely as an agency of the
latter. Also, when the officers and SH
(stockholders) are substantially the same and
system of operations unified.

Agatha Castillejo

Corporations are created by law or

operation of law.
It may not be created by mere agreement
of parties unlike partnerships.
It requires special authority or grant by the
state.
It is exercised by the legislature either by
special incorporation, which creates
corporations directly or by general
incorporation law, under which persons
desiring to be and act as a corporation
may incorporate.

The general law that governs the creation

of private corporations is B.P. 68
(Corporation Code of the Philippines)
Private Corporations owned and controlled
by the govt. or its instrumentality are
created by special laws.
The exceptions to the need of legislative
grant are corporations by prescription. I.e.
the Roman Catholic Church.

POWER, ATTRIBUTES, AND PROPERTIES OF A CORPORATION

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Corporations may only exercise powers that are

granted by law; however, express grant is not
necessary.
Such powers are:
o Those that may be implied by from expressly
provided laws.
o Those which are incidental or essential to its
existence.
Examples are :
o Corporation incorporated as railroad corp. as
to building of railroads being necessary or
essential to the power vested to it.
o But a corp. organized for the purpose of
supplying electricity has no power to buy and
sell agricultural lands.

RIGHT OF SUCCESSION OF A CORPORATION

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It has the capacity of continuous existence even in

the event of death, withdrawal, insolvency, or
incapacity of its SH, and of the transfer of its shares
or interest
A Corporations life should not be longer than 50
years from date of incorporation unless sooner
dissolved or extended.
Corporations created by special laws shall have the
right of succession for the term provided in the laws
creating them.

Agatha Castillejo

DISTINCTIONS
CORPORATION

BETWEEN

PARTNERSHIP

PARTNERSHIP

Manner
creation

of

Created
by
agreement of parties

AND

CORPORATION

Created by law
operation of law

or

No.
of
incorporators

May be organized by
2 persons

Commencem
ent
of
juridical
personality

Acquires
Juridical
personality from the
moment of execution
of the contract of
partnership

Requires at least five Interest

incorporations
(except a corporation
sole)

transfer
his
interest
upon
consent of all
the
partners
(concept
of
delectus
personam)
Any period of
time stipulated
by the partners
Limited
partnership must
contain the word
Ltd.

even
without
consent form other
stockholders

Acquires
corporate
existence
upon
issuance
of
the Term of existence
May not exceed 50
certificate
of
years
incorporation by the
May adopt any
SEC by its official Firm name
name
provided,
seal
Powers
May
exercise
any only those expressly
not similar to any
power authorized by provided by law or
registered
firm
the partners as long those incidental to its
name or contrary
as not contrary to creation
to law
Dissolution
At any time by Must
have
the
L,M,GC,PO,PP
Management When there is no Power to do business
the will of any of consent
of
the
appointed managing and manage affairs
the partners
state
Civil Code
Corporation Code
partner, every partner are done by the Governing law
is an agent
board of directors or
trustees
SIMILARITIES
BETWEEN
A
PARTNERSHIP
AND
A
Effect
of A partner may sue a Must
sue
the
CORPORATION
mismanage
co-partner
member concerned
ment
under the name of
- Have juridical personality separate and distinct from
the corporation
the individuals composing it
Right
of No right of succession Has
right
of
- Can only act through agents
succession
succession
- Composed of aggregate of individuals except a sole
Extent
of Partners
except Stockholders are only
corporation
liability to 3rd limited partners are liable to the extent of
- Distribute profit to those who contribute capital
- Can be organized by a law authorizing its
persons
personally
and their investment or
organization
subsidiary liable
shares
- Both are taxable
Transferability
of Can
only Can transfer stock
Agatha Castillejo

ADVANTAGES OF A BUSINESS CORPORATION

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Has legal capacity to act as a legal unit

Has continuity of existence cause of nondependence on the lives of those who compose it
Credit is strengthened by continuity of existence
Management is centralized in the board of directors
Creation, organization, management and dissolution
are standardized under the general incorporation law
Feasible gigantic financial enterprise from many
individuals to invest their separate funds in the
enterprise
Shareholders have LIMITED liability (only to the
extent of their shares)
They are not general agents of the business
Shares of stocks can be transferred without consent
of other stockholders

CLASSIFICATIONS OF CORPORATIONS UNDER THE CODE.

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DISADVANTAGES OF A BUSINESS CORPORATION

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Formation
and
management
are
relatively
complicated
High cost of formation and operation
Credit is weakened by the limited liability of SH
Lack of personal element in transferability of shares
Greater degree of governmental control and
supervision compared to others
SHs voting rights have become theoretical
particularly in large corp. because of the use of
proxies
SHs have little voice in the conduct of business
Large corp. have separate power of management
and control and power of ownership

SEC.3 CLASSES OF CORPORATION

Agatha Castillejo

Corporations formed or organized under this Code may

be stock or non-stock corporations. Corporations which
have capital stock divided into shares and are authorized
to distribute to the holders of such shares dividends or
allotments of the surplus profits on the basis of the shares
held are stock corporations. All other corporations are
non-stock corporations.

The Corporation Code classifies private corporations

into stock and non-stock corporations, according to
whether their membership is represented by shares
of stock or not.
A stock corporation is the ordinary business
corporation created and operated for the purpose of
making a profit which may be distributed in the form
of dividends to stockholders on the basis of their
invested capital. The two elements mentioned in
Section 3 must be present to make a private
corporation fall under the definition of a stock
corporation.
Unlike stock corporations, non-stock corporations do
not issue stock and are created not for profit but for
the public good and welfare. Of this character are
most of the religious, social, literary, scientific, civic
and political organizations and societies. Non-stock
corporations have no capital stock which can be
subscribed by their members. Their capital are
sourced from contributions and donations. They are
primarily governed by Title XI of the code.

OTHER CLASSIFICATIONS OF CORPORATION

As to number of persons who compose them:

(a) Corporation aggregate or a corporation consisting
of more than one member or corporator; or
(b) Corporation sole or a religious corporation which
consists of one member or corporator only and
his successors, such as a bishop.
As to whether they are for religious purpose or not:
(a) Ecclesiastical corporation or one organized for
religious purposes; or
(b) Lay corporation or one organized for a purpose
other than for religion. Lay corporations, in turn,
may be either eleemosynary or civil.
As to whether they are for charitable purposes or
not:
(a) Eleemosynary corporation or one established for
charitable purposes; or
(b) Civil corporation or one established for business
or profit.
As to state or country under or by whose laws they
have been created:
(a) Domestic Corporation or one incorporated under
the laws of the Philippines; or
(b) Foreign corporation or one formed, organized, or
existing under any laws other than those of the
Philippines.
As to their legal right to corporate existence:
(a) De jure corporation or a corporation existing in
fact and in law; or
(b) De facto corporation or a corporation existing in
fact but not in law.
As to whether they are open to the public or not:
(a) Close corporation or one which is limited to
selected persons or members of a family; or

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(b) Open corporation or one which is open to any

person who may wish to become a stockholder or
member thereto.
As to their relation to another corporation:
(a) Parent or holding corporation or one which is so
related to another corporation that it has the
power either, directly or indirectly to, elect the
majority of the directors of such other
corporation; or
(b) Subsidiary corporation or one which is so related
to another corporation that the majority of its
directors can be elected either, directly or
indirectly, by such other corporation.
As to whether they are corporations in a true sense
or only in a limited sense:
(a) True corporation or one which exists by statutory
authority; or
(b) Quasi-corporation or one which exists without
formal legislative grant. It is an exception to the
general rule that a corporation can exist only by
authority of law; and it may be:
1. Corporation by prescription or one which
has exercised corporate powers for an
indefinite period without interference on
the part of the sovereign power and which,
by fiction of law, is given the status of a
corporation. The Roman Catholic Church
has been recognized as a corporation by
prescription having acted as such and
assumed corporate powers for a long
period of time; or
2. Corporation by estoppels or one which in
reality is not a corporation, either de jure

or de facto, because it is so defectively

formed, but is considered a corporation in
relation to those only who, by reason of
their acts or admissions, are precluded
from asserting that it is not a corporation.
As to whether they are public or private purpose:
(a) Public corporations or those formed organized for
the government of a portion of the State; or
(b) Private corporations or those formed for some
private purpose, benefit, or end; it may be either
a stock or non-stock corporation, governmentowned or controlled corporation or quasi-public
corporation.
TEST OF DISTINCTION
PRIVATE CORPORATIONS.

BETWEEN

PUBLIC

AND

The true test is the purpose of the corporation. If the

corporation is created for political or public purpose
connected with the administration of government,
then it is a public corporation. If not, it is a private
corporation although the whole or substantially the
whole interest in the corporation belongs to the
State.
1. In the Philippines, the public corporation are the
provinces, cities, municipalities, and barangays.
In addition, the Constitution mandates the
creation of autonomous regions in Muslim
Mindanao and the Cordilleras. These local units
are also called municipal corporations or local
governments.
2. Private corporations include:
(a) Government-owned or controlled corporation
or those directly created by special law or, if
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organized under the general corporation law,

are owned or controlled by the government
directly through a parent corporation or
subsidiary, to the extent of at least a majority
of its outstanding capital stock or of its
outstanding voting capital stock. They may be
stock
or
non-stock,
and
performing
governmental or proprietary functions. These
corporations
are
private
not
public
corporations because they are not established
for the Government Service Insurance System,
National
Power
Corporation,
Philippine
National
Railways,
Philippine
Charity
Sweepstakes, etc.; and
(b) Quasi-public corporations or those which have
accepted from the State the grant of a
franchise or contract involving the rendition or
performance of some public duties or service,
but which are organized for profit. They are
also known as public utilities or public
service corporations. Examples of these
corporations are those organized as electric,
water,
telephone,
and
trasporattion
companies.
SEC.4 CORPORATIONS CREATED BY SPECIAL LAWS
OR CHARTERS. --- CORPORATIONS CREATED BY
SPECIAL LAWS OR CHARTERS SHALL BE GOVERNED
PRIMARILY BY THE PROVISIONS OF THE SPECIAL LAW
OR CHARTER CREATING THEM OR APPLICAPLE TO
THEM, SUPPLEMENTED BY THE PROVISIONS OF THIS
CODE, INSOFAR AS THEY ARE APPLICABLE.

INCORPORATION OF A PRIVATE CORPORATION BY A

SPECIAL ACT.
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Section 4 authorizes the creation of private

corporations by special laws or charters. The
enactment of a special act creating a private
corporation is subject to the constitutional limitation
that such corporation shall be owned or controlled
by government or any subdivision or instrumentality
thereof. The reason for this restriction is obvious:
1. It is chiefly to prevent the granting of special
privileges to one body of men without giving all
others the right to obtain them in the same
conditions; and
2. Perhaps, it is partly to prevent bribery and
corruption of the legislature. A corporation
created by a special law or charter is primarily
governed by such law and suppletorily, by the
provisions of the Code insofar as they are
applicable, either because they are not
inconsistent with, or are expressly made
applicable by the special law.

SEC.
5.CORPORATORS
AND
INCORPORATORS,
STOCK-HOLDERS AND MEMBERS. --- CORPORATORS
ARE THOSE WHO COMPOSE A CORPORATION,
WHETHER AS STOCK-HOLDERS OR AS MEMBERS.
INCORPORATORS ARE THOSE STOCKHOLDERS OR
MEMBERS MENTIONED IN THE ARTICLES OF
INCORPORATION AS ORIGINALLY FORMING AND

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COMPOSING THE CORPORATION AND WHO ARE

SIGNATORIES THEREOF.
CORPORATORS IN A STOCK CORPORATION
ARE CALLED STOCKHOLDERS OR SHAREHOLDERS.
CORPORATORS IN A NON-STOCK CORPORATION ARE
CALLED MEMBERS.
COMPONENTS OF A CORPORATION.
1. Corporators or those who compose the
corporation, whether stockholders or
members. Hence, the term includes
incorporators, stockholders, or members;
2. Incorporators
or
those
corporators
mentioned in the articles of incorporation
as originally forming and composing the
corporation and who executed and signed
the articles of incorporation as such. So, all
incorporators
are
corporators
but
corporator
is
not
necessarily
and
incorporator. The principal function of the
incorporator
is
to
incorporate
the
corporation and to enable it to become a
body politic and corporate under the law;
3. Stockholders or the owners of shares of
stock in a stock corporation. They are the
owners of the corporation. They are also
called
shareholders.
They
are
the
corporators in a stock corporation.
Stockholders may be natural or juridical
persons but only natural persons can be
incorporators; and

4. Members or corporators of a corporation

which has no capital stock. Under the old
rule, they include corporators of a stock
corporation who do not own capital stock.
In other words, a stock corporation may be
composed of stockholders and members,
the latter referring to incorporators who do
not own shares of stock. It is not required
that an incorporator be a subscriber for
stock as long as the minimum requirement
are complied with. The Code eliminated
this rule. All incorporators in a stock
corporation must now own or at least be a
subscriber to at least one share of the
capital stock of such corporation.
THREE OTHER CLASSES.
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There are three other classes of persons who play

important roles in the formation and organization of
a corporation, namely:
1. Promoters or persons who bring about or cause
to bring about the formation and organization of
a corporation by bringing together the
incorporators or the persons interested in the

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enterprise, procuring subscriptions or capital for

the corporation and setting in motion the
machinery which leads to the incorporation of the
corporation itself. They lay the groundwork for
corporate existence;
2. Subscribers or persons who have agreed to take
and pay for original, unissued shares of a
corporation formed or to be formed. So,
subscribers may not be stockholders. They
become stockholders from the time their
subscriptions are accepted by the corporation;
and
3. Underwriter or a person, usually and investment
banker, who: (a) has agreed, alone or with others,
to buy at stated terms an entire issue of
securities or a substantial part thereof; or (b) has
guaranteed the sale of an issue by agreement to
buy from the issuing party any unsold portion at
a stated price; or (c) has agreed to use his best
efforts to market all or part of an issue; or (d)
has offered for sale stock he has purchased from
a controlling stockholder.